For years, big brands led the market higher. Whether it was Procter & Gamble (PG, Financial), Nike (NKE, Financial), Nestle (XSWS:NESN) or Johnson & Johnson (JNJ, Financial), investors flocked to these blue-chip stocks.
The rise of big brands makes sense given the historical paradigm. For decades, distribution, stocking and promotion were expensive activities. Only the biggest were able to compete. And the bigger a brand got, the stronger it became.
Let's use Procter & Gamble's Tide detergent as an example. Consumers love this brand. Since 1949, it's been the leading detergent in the U.S. This isn't necessarily because Tide is a genius product. It's mainly because Procter & Gamble controlled the game.
For decades, detergent production was an expensive process. It involved building manufacturing plants and hiring workers. Distribution was also a tricky game. You needed to deploy hundreds of trucks. Plus, you needed to persuade retailers to stock the product, which bigger players could more easily do. Finally, you needed to market the merchandise. Television commercials could cost millions of dollars to air.
All of this in combination meant that only the biggest players could survive and thrive. There's a reason why Procter & Gamble owns hundreds of brands and commands a $350 billion market cap.
This game may be coming to an end, though. Procter & Gamble generated annual revenue growth of negative 1.5% over the last five years. Nike's revenue just fell by 5% year over year. So did Nestle's.
The problem isn't specific to any one company. This is an industry-wide shift.
Welcome to the new game
The power of big brands came from three areas: manufacturing, distribution and marketing. This power has been disintermediated on every front.
Just consider the latest direct-to-consumer brands that have millions of followers. Prime examples include Allbirds, De Luneand Hims. These company's manufacture, distribute and sell their products while circumventing the traditional power structure.
For example, with co-manufacturing agreements, startups can allocate production volumes at an existing facility. They don't need to have millions of dollars to build their own. Depending on the use case, custom products can be created with as little as a few thousand dollars.
Then we move to distribution. Allbirds doesn't need to convince shoe stores to sell its latest line. It simply needs to upload the product image, description and price to its website. De Lune doesn't need to worry about which brick-and-mortar aisle its period symptom solutions should be stocked in. Everything is online. Hims has even found a way to deliver telemedicine without ever opening a doctor's office.
The final aspect is promotion. Big brands typically spend millions on television commercials. With the internet, any company can now acquire its first users by spending a few dollars on targeted Facebook (FB, Financial) ads.
Bet on this stock
Want to win the new game? Buy stock in the enablers of today's reality. The best pick is Shopify (SHOP, Financial).
There's no doubt that Shopify stock is expensive at 60 times sales. Who would pay such a steep premium? Investors no doubt asked the same question when shares were at $30, $100 and $1,000. The stock is now above $1,300.
Good stocks are almost always expensive, especially when they use a platform model.
A platform model is exactly what it sounds like. It allows other things to be built on top. Microsoft (MSFT, Financial) Windows is a classic example. Tons of applications are built on Windows, but remove the operating system, and everything goes away. Shopify is playing the same game.
With Shopify, anyone, anywhere can set up an e-commerce store in minutes. You can begin selling shortly after. All of this only takes a few clicks.
The genius is that Shopify includes a ton of tools, including payment processing, marketing, inventory management, promotions, chat and more. It's a one-stop shop.
Like Microsoft, Shopify didn't opt to build everything itself. It opened its platform to others. Right now, thousands of developers are building on Shopify to increase its capabilities. That attracts more users, which in turn attracts more developers. It's a virtuous cycle.
There's a reason why 70% of U.S. shoppers go to Amazon (AMZN, Financial) first when purchasing a product online. Platforms are a winner-takes-all game. The bigger they get, the stronger they become.
Shopify stock is pricey, but the key indicator to look at is market cap. With a $160 billion valuation, Shopify is arguably cheap. Its long-term total addressable market is easily in the trillions of dollars. If you understand platforms, you'll know that Shopify is likely to take a lion's share of this opportunity.
Disclosure: Author owns no shares in any company mentioned.
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